Prime
Increasing import bill hits foreign exchange reserves
Demand for imports has been increasing amid low dollar inflows, which has forced the Central Bank to step in. Photo | File
What you need to know:
- This was a result of the growing demand for imports amid a slowdown in dollar inflows and low export receipts.
- The drawdown, therefore, resulted into a slight decline in the duration of foreign exchange reserve cover for imports from 4.4 months to 4.3 months.
Bank of Uganda made a $216.8m drawdown from the reserve account during the quarter ended February to fund a widening deficit resulting from growth in the import bill.
This was a result of growing demand for imports amid a slowdown in dollar inflows and low export receipts.
The drawdown, therefore, resulted into a slight decline in the duration of foreign exchange reserve cover for imports from 4.4 months to 4.3 months.
According to the Bank of Uganda Monetary Policy report, the stock of reserves estimated for the quarter ended February declined to $3.5b (4.3 months of imports cover) down from $3.6b (4.4 months of import cover) as of November 2020.
This therefore, the Central Bank noted, saw the balance of payments record a growth in deficit of $216.8m compared $96.7m that was recorded in the quarter ended November 2020 due to insufficient inflows to offset the current account deficit.
However, Bank of Uganda noted, the country’s foreign exchange reserves were still within East African Community’s target of 4.5 months of imports cover.
Foreign exchange reserves, which are usually held in foreign currency consist of different assets, which can be held in international currencies such as Dollars, Euros, Pounds or Japanese Yen.
The Central Bank manages foreign exchange reserves to meet a number of macroeconomic objectives, among which include maintaining confidence in the country’s monetary and exchange rate policies and financial markets as well as ensuring that the country has sufficient capacity to service its external obligations.
During the period, the Central Bank said, the current account deficit, which is the difference between a country’s exports and imports, worsened to grow by 24.9 per cent to $1.9b, noting it is likely to deteriorate further as recovery in domestic demand continues to drive demand for goods and services.
However, Bank of Uganda noted a gradual recovery in travel (tourism) receipts and a pickup in foreign direct investment inflows, especially in the oil and gas sector, are expected to close the gap in the medium term.
Expanding trade deficit
According to Bank of Uganda, during the quarter ended February, the Trade deficit, which is the amount by which the cost of a country’s imports exceeds its exports, expanded widely to $666.3m from just $8.1m in November 2020, due to an increase in imports, which more than offset the increase in export earnings.
